IMF sees room for global rate cuts

Economists lower their worldwide growth forecast

RachelKoning

WASHINGTON (CBS.MW) -- Key central banks, including the Federal Reserve, still have room to cut interest rates if the global economy needs it, the International Monetary Fund said Wednesday.

"The pace of recovery has slowed ... amid rising uncertainties in the run-up to war in Iraq and the continued adverse effects of the fallout from the bursting of the equity market bubble," the IMF said in its most recent World Economic Outlook.

The international financial organization said specifically that higher oil prices had a stranglehold on the global economic recovery. It did not say by how much or when the central banks should consider cutting rates.

The IMF believes world output grew 3 percent in 2002 and will improve modestly to 3.2 percent this year. But that's a half percentage point lower than in a previous forecast. Global growth is projected at 4.1 percent next year.

The outlook was released as the IMF begins biannual meetings held simultaneously with a World Bank conference and weekend meetings of finance ministers from the Group of Seven industrialized nations.

"Markets remain volatile, with the potential for substantial movements in either direction depending on how the geopolitical situation develops," the IMF said.

"But authorities -- including the Fed, the European Central Bank and even the Bank of Japan -- still have room to reduce rates further," the IMF said.

IMF economists would not give specific targets for interest rates, but urged more disclosures on midterm inflation goals. This stops short of a call for a specific inflation band in the United States, however.

Ken Rogoff, the IMF's research director, said Wednesday the biggest risk to the organization's cautious growth outlook is that oil prices now recede more dramatically than the group is forecasting.

But the most significant downside risks to this outlook lie in the duration of the Iraq war [the latest reports Wednesday show coalition troops in control of Baghdad], the lingering effects of the stock bust and currency market fluctuations.

U.S. must lead

The IMF also notes with some concern gaps in interest rates and recovery potential among key G-7 nations, "which will tend to increase global dependence [for recovery] on U.S. growth."

The pressure on the United States to snap back intensifies because "it's not obvious anyone else can take up the slack," said David Robinson, IMF deputy director of research.

Members said U.S. corporate balance sheets have improved to a larger degree when compared to their overseas brethren. Banks in Germany are particularly worrisome but conditions there fall short of a "credit crunch," Robinson said.

Rogoff and colleagues said the potential for a housing price bubble in the United States and some European nations also presents a risk to the recovery outlook. Additionally, the impact of the SARS virus on Asian markets could spread to the broader global economy, the IMF believes.

Members said the risk that security fears linger even after the war could mean that "normal" growth for a post-9/11 global economy is more likely 3.75 percent not the 4 percent target held by the IMF, Rogoff said.

Asked at a press briefing if the onus for stimulus in the United States now lies with fiscal rather than monetary stimulus, Rogoff cited some concern about the budget implications of the Bush tax and spending proposal.

"I'm sympathetic to the notion it's important to eliminate double dividend taxes," Rogoff said, adding that the policy change could have positive long-term economic implications for the United States.

But because of war costs and weak tax receipts, the "timing is awkward," he said.

Others added that rising deficits should be an issue at the forefront for the United States and to a larger degree Europe and Japan, given aging populations the world over. The panel said it has long believed the United States should strive to maintain a balanced budget.

Growth projections

The United States probably saw a 2.4 percent rise in output last year, cooling to a 2.2 percent gain this year and restored to 3.6 percent in 2004, the IMF said.

Rogoff forecast that 2003 growth won't be enough "to make a dent" in the unemployment rate.

The euro area expanded 0.9 percent in 2002, the IMF suggests, and will probably show 1.1 percent growth for 2003 and 2.3 percent growth in 2004.

Officials said that while the IMF saw room for lower interest rates via the European Central Bank, it was not to be assumed that a short-term fix was all that was needed.

The IMF stressed that structural reforms, particularly lowering labor costs and boosting productivity, should be emphasized by policymakers.

Meanwhile, Japan probably saw a 0.3 percent rise in output last year and will see modest improvement to 0.8 percent and 1 percent in 2003 and 2004, respectively, the report said.

The IMF wants the Bank of Japan to specifically state that it intends to eliminate deflation.

The IMF believes that a Bank of Japan inflation target of at least 2 percent and above would eliminate deflation risk, said Jonathon Ostry, IMF assistant director of research.

The IMF calculates that output in the United Kingdom expanded 1.6 percent last year and will rise 2 and 2.5 percent this year and next.

Canada proved the star of the industrialized nations, with its economy growing 3.4 percent in 2002, according to IMF estimates. Its economy might cool to 2.8 percent output growth this year but then expand 3.2 percent in 2004.

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